Product-market fit describes the way a company’s product or service satisfies an undeniable market demand. Nailing product-market fit is essential for a product’s success. And it’s what every startup strives to achieve.
Product-Market Fit Definition
Product-market fit refers to the alignment between a product’s value proposition and the underserved needs of its target customers. There are different ways to try to measure product-market fit, but you know you’ve achieved it when customers enthusiastically buy, use and share your product.
What Is Product-Market Fit?
Investor and Netscape co-founder Marc Andreessen popularized the term product-market fit in a 2007 blog post, where he wrote that it “means being in a good market with a product that can satisfy that market.”
“And you can always feel product/market fit when it’s happening,” Andreessen continued. “The customers are buying the product just as fast as you can make it — or usage is growing just as fast as you can add more servers. Money from customers is piling up in your company checking account. You’re hiring sales and customer support staff as fast as you can.”
Why Is Product-Market Fit Important?
Venture capitalists often want evidence of product-market fit before they invest in a startup (even Andreessen categorizes startups in two ways: before product-market fit and after product-market fit). That’s because product-market fit, in a sense, validates a company’s business model, and finding it creates opportunities for growth.
Examples of Product-Market Fit
To get a better sense of product-market fit and the lasting impact it can have, consider the following examples.
Superhuman
For its email inbox product, Superhuman relied on a customer feedback process to uncover that users were most interested in features like greater automation, faster speed and a mobile app. The company responded by investing in these aspects of its product.
Airbnb
In its early days, leaders at Airbnb collected feedback from both hosts and users who had used the room-booking platform, asking them to envision the “product of their dreams.” Through these conversations, as well as various tests with its product, the company realized that it could be used for travel more broadly, not just for capturing the spillover from large conferences and sold-out hotels.
Netflix
Netflix upended the traditional cable model with the introduction of streaming. This allowed people to watch from a library of movies and shows on demand, without commercials, and without paying for a bunch of channels they never watched anyway. The company further catered to consumers’ interests by creating original content.
Spotify
Spotify created a platform that allowed users — who had grown accustomed to piracy — to listen to digitally delivered music without having to pay for it, but in a way that was both legal and provided the music industry with some form of compensation.
Slack
The developers of Slack realized how useful the messaging tool could be while using it to communicate asynchronously during a project. Designed to keep remote teams connected, Slack replaces slower methods like email with a single app that can be used for texting, phone calls and group meetings, among other uses.
How to Achieve a Product-Market Fit
Finding product-market fit may look different depending on the product, industry and business. That said, Dan Olsen, author of The Lean Product Playbook, recommends six steps:
1. Determine the Target Customer
Finding the right consumer for a product means asking who might buy the product and if they do, will it meet a consumer need? Olsen recommends conducting market research and creating consumer personas. Creating a persona is essentially developing a profile of an ideal audience or consumer of a product. This can help you visualize and develop what products would be useful to a certain type of consumer.
2. Identify Underserved Customer Needs
Selling a product to a market that is already oversaturated and serving consumers is definitely not a good idea. But you can ask what these consumers might be unhappy with and what your product might be able to change.
3. Define the Product’s Value Proposition
Defining a product’s value is essentially understanding how it can be better than those offered by competitors. Factors in this category to think about include quality, price as well as additional services and marketing.
4. Specify a Minimum Viable Product Feature Set (MVP)
Every product needs to have a baseline of features before it’s released. These features should be simple but essential to functionality and performance.
5. Create an MVP Prototype
The good thing about MVPs is that they don’t need to be a version of the final products. MVPs are meant to help gain consumer feedback that can be applied to the next iteration of a product.
6. Test the MVP With Customers
Getting feedback from consumers is a crucial step to achieving a product-market fit. Letting consumers test a product can help developers understand what’s working and what isn’t.
How to Measure Product-Market Fit
There are several methods and approaches to use when trying to measure product-market fit.
The Sean Ellis Survey Method
When Sean Ellis, author of Hacking Growth, began work at a software company called Xobni, he developed a series of customer satisfaction questions intended to assess how much loyalty Xobni’s customers (who were mostly managers) had to the product.
He deliberately left out the word “satisfaction,” because, as he told Built In, “a good manager is never satisfied.” Instead, he asked, “How would you feel if you could no longer use [this product]?” Four answer choices — very disappointed, somewhat disappointed, not disappointed (it isn’t really that useful) and not applicable (I no longer use [product]) — became the basis for a quantitative framework to assess product-market fit.
One of the advantages of Ellis’s survey is its speed of delivery; it can be easily administered through survey tools. Another strength is its depth: “The benefit of surveys versus retention cohorts is that you can use them to understand everything about the users. ‘Who are they? What were they using before? Why did they decide to try the product?’” Ellis said.
There are still rules to administering the survey. It’s important to filter out users who register, but never use your product. Ideally, the survey should be administered to 40 users who have interacted with the product at least twice in two weeks.
Cohort Retention Rate
Cohort retention rate measures the percentage of active users who continue to use a paid product after a set period of time, typically eight weeks after onboarding. Resembling a hockey stick, the downward-sloping curve should flatline above zero.
While Cohort retention rate has been widely touted as an indicator of product-market fit, the formula requires data most startups don’t have access to in their first months, Ellis said. If you do have the data, however, the cohort retention curve can be telling.
“When we look at what builds scalable acquisition channels, it’s having a strong cohort retention rate,” Danielle Cohen-Shohet, CEO of GlossGenius, told Built In.
The retention curve tends to be less biased than survey methods, Cohen-Shohet added. “You’re getting information from all users, not just ones that have enough time and intent to fill out a survey. You’re getting full life-cycle data, not data from a specific survey at a specific point in time.”
Net Promoter Score
Net promoter score is an indication of how likely users are to recommend the product to others. The score can be tallied with a single question: “How likely is it that you would recommend our product or service to a friend or colleague?”
People who rate the product six or lower are called “detractors,” those who give the product a seven or eight are called “passives” and respondents who select a nine or 10 are “promoters.” These responses are then plugged into the formula below for a score:
NPS = % of promoters – % of detractors
According to Ellis, net promoter score may not tell you whether you have product-market fit. Even so, it’s a useful measure of a company’s customer experience and perceived ethos.
Customer Lifetime Value (LTV/CAC Ratio)
The lifetime value to customer acquisition cost ratio — arguably the most revenue-driven framework — is a measure of how much you make from a customer relative to how much you spend to get one.
A report in Klipfolio describes one of the most powerful indicators of product-market fit by this equation:
(LTV) = Gross Margin % X Avg. Monthly Payment / Churn Rate
/
(CAC) = Sales and Marketing Costs / New Customers Won
This might seem like a straightforward metric until you start to unpack marketing acquisition costs and define what it means to be an acquired customer.
Go-to-Market
Some entrepreneurial-minded skeptics, like Alex Willen, who spent a decade as a product manager at early-stage startups, view the above methods as lagging indicators of product-market fit. Because there’s no better way to know if people want your product than if they actually pay for it, he said.
If going to market without knowing you have product-market fit is prohibitively expensive or time-consuming, find a hack that’s a cheaper way to judge people’s intent to purchase your product. For a consumer app, that might mean running ads for it and seeing if people click on them.
There’s a tradeoff between the upfront time and cost investment you make and how strong of a product-market fit gauge you’ll get in return. If you fully build and launch your product, you’ll have a nearly irrefutable determination — the product sells well or it doesn’t — but at a high cost. If you send a quick survey to people in your network asking if they’d be interested in your product, you’re not going to get a great signal of product-market fit, but your cost will be low.
The key, according to Willen, is to find the right balance of cost versus signal quality. In some cases, you might need to launch a scaled-down version of your app, whereas in others you might do well building a deck that lays out the product and value proposition for people in your target audience.
Frequently Asked Questions
What is product-market fit?
Product-market fit refers to a product that satisfies the needs of consumers in a market. A company knows it’s achieved product-market fit when a product drives long-term growth and profitability.
What are the stages of product-market fit?
The stages for achieving product-market fit are as follows:
- Identify the target audience.
- Research their needs.
- Develop a product value proposition.
- Design a minimum viable product
- Test the product on a group of users.
- Make changes as needed and repeat the process.
What is an example of a product market fit?
Consider the messaging app Slack. Its developers realized its usefulness while using it for remote communication during an earlier project. The app replaces inefficient forms of asynchronous communication like email, combining messaging, phone calls and other features into a single app that makes it much easier for hybrid and remote teams to stay in touch and be more productive.
